AUDITING PROBLEMS

 CPAs CAN LEARN HOW TO BETTER DETECT financial statement fraud by understanding the mistakes others made in cases where the SEC imposed sanctions on auditors for their association with fraudulently misstated financial statements. This article focuses on 45 SEC enforcement actions against auditors in the period 1987 to 1997.
 THE MOST COMMON PROBLEM, IN 80% of the cases, was the auditor’s failure to gather sufficient audit evidence. Many of the cases involved inadequate evidence in areas such as asset valuation, asset ownership and management representations.

 IN ALMOST HALF OF THE ENFORCEMENT ACTIONS, the SEC alleged the auditors failed to apply GAAP pronouncements or applied them incorrectly. One way firms can deal with this problem is to expand the coverage of technical accounting topics in firm-sponsored training.

 AUDIT PROGRAM DESIGN WAS A PROBLEM CITED in 44% of the cases. Auditors failed to properly assess inherent risk and adjust the audit program accordingly. The best way for a firm to remedy such deficiencies is to promote more involvement by audit firm executives—partners and managers—in planning the engagement.

 OTHER COMMON AUDIT PROBLEMS INCLUDE FAILURE to exercise due professional care and the appropriate level of professional skepticism, overreliance on inquiry as a form of audit evidence, deficiency in confirming accounts receivable, failure to recognize related party transactions and assuming internal controls exist when they may not.

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